Private equity and the healthcare industry

Most experts in mergers and acquisitions (M&A) believe healthcare will remain one of the most active industries in terms of private equity investments. That’s why it is important for practice owners to stay in tune with key trends and transaction activity should they consider a potential sale.

The total value of healthcare private equity deals announced in 2016 surged to $36.4 billion, the highest level since 2007, according to Bain & Company. Healthcare has been a solid investment for private equity firms, ranking among the top three industries for returns each year since 2011, according to data from Cambridge Associates.

Gastroenterology and orthopedic practices have seen strong growth, as orthopedic surgeons, neurologists and gastroenterologists remain in steady demand (PDF), underscoring the growing need for specialists for the aging patient population.

Demand from the aging population

In gastroenterology, chronic conditions have doubled from 2000 to 2015. Consider that in the United States, there were 47.8 million people age 65 and older in 2015, and that group is projected to increase to 98.2 million older Americans by 2060, or about one of every four U.S. residents. This growth will likely be due in part to an anticipated increase in U.S. life expectancy, from around 79.2 years in 2015 to 81.4 years by 2030.

Shift to outpatient care

Outpatient services rapidly expanded (PDF) nationwide in recent years, including 33% growth in spending from 2012 to 2016. Private equity firms and strategic buyers will continue to reinforce their portfolios with aggressive investments in outpatient medical groups to drive regional consolidation.

Growth in surgical volume

Increasing total procedures and the resultant stress on inpatient locations suggest that investments in surgical specialties will remain strong. One example of this was the meaningful increase in procedures requiring anesthesia in 2017.

Emphasis on quality of services

Rapid expansion and high demand in healthcare create cost-control challenges as providers still seek to provide and maintain quality services. As a result, M&A have been a frequent means for healthcare providers to pursue adoption of new medical technologies, optimize operations, enhance their services and broaden health initiatives to yield optimal results.

Replicating success in other specialties

In the late 1990s, private equity firms successfully scaled dental practices. Practice owners in specialties such as gastroenterology and orthopedics can expect to see a wave of M&A in their space.

For those owners considering retirement or other exit from their practice, planning should begin at least three years in advance. By considering a partnership with a private equity firm, owners can potentially accelerate growth, expand market share and increase the profitability of their practice.

These areas of healthcare appear positioned for long-term growth, and are likely to see increased investment from private equity firms. Practice owners assessing their needs for such growth or the possible departure of retiring stakeholders have an opportunity to leverage this interest to take their practices in a new direction.   

Case study: Family Help & Wellness

In 2014 Trinity Hunt Partners (THP), a middle-market private equity firm with a background in healthcare services, invested in Family Help & Wellness (FHW), an operator of behavioral health programs serving adolescents and young adults nationwide. Prior to its work with FHW, in 1999 THP became the first institution to invest in Heartland Dental, which grew to become the largest dental practice management company in the United States.

Via a private equity partnership, FHW grew from seven programs to 15, becoming the largest player in its market. This allowed FHW to reinvest in its quality of care, as the company has developed additional dedicated resources around safety and compliance.

“The Family Help & Wellness story was a great example of an exceptional entrepreneurial business that could benefit from additional financial and operating support to become the leader in its market,” said Blake Apel, principal, THP. “We were able to customize an investment for their unique needs and work in partnership with their management team to build upon their incredible culture of care and add resources to help them grow.”